Among the primary choices a plan sponsor has when considering the management of their 401k plan is bundled or unbundled. For many plan sponsors initiating a smaller plan, the bundled approach may seem more appropriate due to its lower cost. As many later find out, the lower costs also mean they are not getting the advice they need or are being plagued by hidden fees. For more established plans, or plans quickly growing in size, the unbundled approach offers several key benefits that can not only lower their overall costs, but keep their 401k plans on track to meet their goals. It can also be much more effective in keeping plan sponsors out of legal or regulatory trouble. With some of the proposed regulatory changes and the increased scrutiny of plan sponsor fiduciary responsibilities, plan sponsors may be better off considering the unbundled approach.
What’s the Primary Difference between Bundled and Unbundled?
In a bundled arrangement, the recordkeeping platform provides two or more of the primary services for plan management – administrative, recordkeeping, and mutual funds. The typical bundler is an investment company that provides recordkeeping and administration, which also includes access to its proprietary funds or may even have a requirement for using them, with an outside investment advisor. If you are with your payroll provider, then this approach is very similar, but may even be missing an investment advisor if you went directly through your payroll provider. In a typical bundled arrangement, the provider charges a single fee for all services or reduced costs for adding more services.
An unbundled arrangement separates the recordkeeper, administrator and mutual fund providers for each service performed. Each provider answers directly to the plan sponsor and charges for their services separately, increasing accountability.
Why Plan Sponsors Should Consider an Unbundled Arrangement
At a minimum, when working with a separate Third-party administrator (TPA), plan sponsors receive special attention for all aspects of plan design and administration. The TPA is, in essence, a plan sponsor's advocate, helping them to maximize opportunities and minimize liabilities and obligations. TPAs are plan experts whose job is to keep current with all of the trends and regulatory issues that will impact plan sponsors and their plans. That alone may offer the best reason to use the unbundled approach, but here are five other good reasons worth considering:
Customized Plan Design
TPAs use a collaborative approach to working with the plan sponsor and its CPA, and advisors to design a plan specific to the plan sponsor’s objectives. Above all else, the TPA creates a plan that can adapt to the plan sponsor's changing business conditions while satisfying a myriad of regulations that govern employer-sponsored plans. TPAs consider the entire context of the employer’s needs, including tax considerations, contribution limits, and employee demographics. Also, the TPA will work with the company to incorporate techniques that allow for higher contributions for owners depending on their goals.
Bundled plans, however, are one-sized fits all, with little flexibility for adapting to changes. This means if you are the small doctors office and the mid-sized construction company, you may have the very same plans even though your business and its needs are very different.
Efficient Plan Administration
With a TPA, plan sponsors receive proactive administration services keeping them ahead of the curve for compliance testing while constantly monitoring the plan’s qualified status. They can also anticipate potential plan design changes that can help you use the plan more efficiently for accomplishing its goals, whether it be increasing tax savings, retirement savings, or reducing your costs. Bundled providers are generally not proactive, and will only react to a plan sponsor’s request for action, which is often too late. For many employers, this could mean a "surprise" required contribution to employees or contributions being returned to owners and other highly compensated employees. Many times, these "surprises" could have been easily avoided or managed ahead of time.
Independent Investment Advice
Most plan sponsors utilizing unbundled services will engage the services of an independent financial advisor for selecting and managing the plan’s investment options. Financial advisors who are registered with the SEC as a Registered Investment Advisor must strictly abide by fiduciary standards established by law. That means they are required to work only in the best interests of their clients and there can be no conflicts of interest.
Bundled plans are typically offered through investment companies whose brokers are not obligated to act in the best interest of their clients. Many other brokerage firms limit their advisors to certain recordkeeping platforms, limiting the options of the employer and their chances of getting the right platform for them.
Changing Service Providers
Service providers don’t always work out. In an unbundled arrangement, the plan sponsor can replace any one provider – the recordkeeper, the TPA, or the plan's investments – without completely disrupting the plan’s management. With a bundled plan, any change requires replacing all three services at once, which can be even more costly and time-consuming.
Perhaps the single most important issue facing plan sponsors going forward are plan costs and whether they are considered reasonable – currently, and on an ongoing basis. With an unbundled arrangement, the plan sponsor negotiates both the costs and how they are paid for each of the separate services. Not only are the costs completely transparent, but the plan sponsor also has many more options in how to best structure their payment for the benefit of the company.
Bundled plans also bundle their charges, several of which are typically hidden in various aspects of the plan. For instance, a bundled plan provider may offer “free” administrative services; however, the actual costs are recovered through higher fee arrangements within the investment funds. These arrangements can end up costing plan participants much more over the long term.
Although bundled plans may serve a purpose for newer plans, most businesses will quickly outgrow these start-up 401(k) plans. Plan sponsors will more likely experience plan design, qualification or fee disclosure issues and other headaches at some point in time that warrants the expertise of a TPA. Among a plan sponsor's most important fiduciary obligations is to ensure that their service providers are competent and that the costs incurred are reasonable. As regulatory pressures mount, the stakes are increasing far beyond what many plan sponsors can or should risk; not when the alternative of unbundled services is available.